Journal entry for pre paid expenses

300px Assorted United States coins
Image via Wikipedia

Sometimes ago, I have written about how to prepare balance sheet in tally. If you read my old post, then you will know about some basics of accountancy which as accountant you must know. Accounting of journal entry of prepaid expenses is  a must for preparation and finalization of accounting statements as well as to find out the actual profit/loss during the time by the entity

Proper accounting of prepaid expenses is such a basic accounting feature which an accountant must know and understand the same. So you must know what expenses should be  determined as prepaid expenses for journal entry purpose.

In a computerize accounting software like tally, preparing a balance sheet is not as easy as ABC or just pressing certain keys of the key board. However it will be a half-cooked  balance sheet as an accountant should be needed  to pass several journal entry before he generate a perfect balance sheet.

in my earlier post on how to prepare a balance sheet, I have covered several journal entry that should be posted   in the books of account. Today I will explain one more such journal entry that  needs to pass for finalization of books of account. This journal entry is about prepaid expenses.

What is pre-paid expenses?

As the name suggest, it is an expenses which is paid in advance and mostly these expenses are relating to Insurance expenses. A prepaid expenses is calculated and decided on the base of the period covered by that expenses and period covered by the books of account.

Let me explain you with example

A company paid insurance premium on plant and machinery for Rs. 1,00,000 as date 1st June 2009. Now check the period of the policy document. The period is stipulated by the insurance policy is starting from 1st June 2009 to 31st May, 2010.

Now as per the Income tax Rules, books of accounts are required to be prepared as per financial year e.g. from 1st April to 31st March.

So, in the above example Insurance premium pertaining to the period 1st June to 31st March, 2010 only will be accounted in the books of account for the FY 2009010 (In other words it will be debited to profit and loss account) and the balance insurance expenses for the month of April 2010 and May 2010 should be debited to the profit and loss account of the FY 2010-11

So, in the FY 2009-10 two months insurance premium will be shown as advance payment of expenses (Pre paid Expenses under the group loans and advances or current assets) and on the first day of the next year (FY 2010-11 in this case) prepaid insurance expenses entry which was made on 31st March, 2009 is required to be reversed.

to calculate prepaid insurance in the above example, divide entire expenses of Rs.1,00,000 by 12 months it will come out 8333. now multiply it with 2 months period that is relating to next Financial year and will be accounted  as pre paid expenses

Now, Let’s see how to pass this entries in the books of account,

HOW TO PASS JOURNAL ENTRY FOR PREPAID EXPENSES

When the insurance premium of Rs. 1,00,000 paid as on 1st June, 2009 the entry will be made as per below :

Dr. Insurance premium Rs. 100,000.00

Cr. Bank account Rs.100000.00

(Being amount paid towards Insurance premium for the period…… vide policy number…..)

On 31st March 2009, prepaid expense journal entry will be passed as per below for the above expenses

Dr. Prepaid Expenses   Rs. 16,667.00

Cr. Insurance premium Rs. 16,667.00

(Being two months insurance premium transfer to prepaid expenses account)

On 1st April,2010, the above entry will be reversed in the books of account by Dr. Insurance premium and crediting Prepaid Expenses with the same amount i.e. Rs. 16,667.00

EXPENSES WHICH REQUIRES TO BE PASS AS PREPAID

As explained above, any expenses paid in advance as on date of closure of books of account is to be treated as pre paid expenses. Generally following types of transactions are to be looked for prepaid expenses and for this purpose the period covered by the expenses is very important to determine whether an expenses consist a portion of the pre paid expenses

If you need further explanation, then don’t hesitate to drop your comment here.

Latest Comments
  1. ALI July 3, 2010
    • Shamshad Qazi May 27, 2011
      • shadat October 17, 2011
        • Biplab nandy January 16, 2013
      • abdulla May 16, 2012
        • Ravi Shankart July 7, 2012
  2. MEGHNATH December 9, 2010
    • Mahendra December 9, 2010
  3. sonali January 24, 2011
  4. Goutam February 4, 2011
  5. Anil March 1, 2011
  6. Chethana March 3, 2011
  7. rakesh April 17, 2011
  8. swaathi April 20, 2011
  9. pavan July 13, 2011
  10. Raheem August 4, 2011
  11. hema kumar September 12, 2011
    • Mahendra September 12, 2011
  12. sudheesh o v September 29, 2011
  13. kamal debnath November 25, 2011
  14. prateek sharma November 28, 2011
  15. M.Periyasamy December 1, 2011
  16. madani kk April 21, 2012
  17. Alkesh Patel April 21, 2012
  18. Sagar R Sah July 13, 2012
  19. rajani July 22, 2012
  20. divya August 28, 2012
  21. Chetan Kalyan September 1, 2012
  22. Nishant Kumar Jha September 20, 2012
  23. shabana September 24, 2012
  24. aymana hajis November 10, 2012
  25. mahender kumar December 25, 2012
  26. mahender kumar December 25, 2012
  27. amit kumar March 8, 2013
  28. Sneha April 9, 2013
  29. Sekhar April 16, 2013
  30. Amit April 24, 2013
  31. Amit April 24, 2013
  32. sabeena July 8, 2013
  33. manivel .m July 13, 2013
  34. M.ARVINDAKSHAN August 21, 2013
  35. Glenn Macwan August 27, 2013
  36. sakil ahmed August 27, 2013
  37. Rakesh September 10, 2013
  38. sanjay chavan October 24, 2013
  39. Naresh.Chavada January 23, 2014

Leave a Reply

Your email address will not be published. Required fields are marked *

Optimization WordPress Plugins & Solutions by W3 EDGE